Summary of SYNUTRA INTERNATIONAL, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Sections of this Quarterly Report on Form 10-Q (the "Form 10-Q") including, in particular, the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed, implied or forecasted in any such forward-looking statements.

Expressions of future goals and expectations or similar expressions including, without limitation, "may," "should," "could," "expects," "does not currently expect," "plans," "anticipates," "intends," "believes," "estimates," "predicts," "potential," "targets," or "continue," reflecting something other than historical fact are intended to identify forward-looking statements. The factors described in the Company's Annual Report on Form 10-K under Part I. Item 1A. Risk Factors and below in Part II. Other Information - Item 1A. Risk Factors could cause the Company's actual results to differ materially from those described in the forward-looking statements. Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. However, readers should carefully review the reports and documents the Company files from time to time with the SEC, particularly its Quarterly Reports on Form 10-Q, Annual Report on Form 10-K , Current Reports on Form 8-K and all amendments to those reports.

Available Information

The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are filed with the SEC. Such reports and other information filed by the Company with the SEC are available on the Company's website at http://www.synutra.com when such reports are available on the SEC website. The public may read and copy any materials filed by the Company with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Company's references to the URLs for these websites are intended to be inactive textual references only.

OVERVIEW

We are a leading infant formula company in China. We principally produce, market and sell our products under the "Shengyuan," or "Synutra," name, together with other complementary brands. We focus on selling premium infant formula products, which are supplemented by more affordable infant formulas targeting the mass market as well as other nutritional products and ingredients. We sell our products through an extensive nationwide sales and distribution network covering 30 provinces and provincial-level municipalities in China. As of June 30, 2009, this network comprised over 480 distributors and over 1,000 sub-distributors who sell our products in over 72,000 retail outlets.

We currently have three reportable segments which are:

† Powdered formula segment: Powdered formula segment covers the sale of powdered infant and adult formula products. It includes the brands of Super, U-Smart, Mingshan which was launched in October 2008 and Helanruniu which was launched in December 2008;

† Baby food segment: Baby food segment covers the sale of prepared baby food and nutritional snacks for babies and children. It includes the brand of Huiliduo which was launched in March 2009 and the nutritional snacks component which we expect to launch in late 2009;

† Nutritional ingredients and supplements segment: Nutritional ingredients and supplements segment covers the production and sale of nutritional ingredients and supplements such as chondroitin sulfate, and microencapsulated DHA and ARA.

On September 16, 2008, we announced a compulsory recall on certain lots of U-Smart products and a voluntary recall of other products that were contaminated or suspected to be contaminated by melamine, a substance not approved for use in food and linked to recent illnesses among infants and children in China. The cost of this action during the year ended March 31, 2009 was $101.5 million, including the cost of product replacement of $48.1 million in cost of sales, the write-down and write-off of affected inventory of $48.5 million in cost of sales, the net amount of $2.3 million to a compensation fund set up by China Dairy Industry Association to settle existing and potential claims arising in China from families of infants affected by melamine contamination in general and administrative expenses, and freight charges of $2.6 million in selling and distribution expenses, of which $4.5 million was recorded as a product recall provision in the consolidated balance sheet as of March 31, 2009. In the fiscal quarter ended June 30, 2009, the Company reversed recall expense of $0.7 million, mostly being overestimated product replacement cost. These costs represent the Company's estimate of probable costs based on available data and take into account factors such as expected return rates for the affected units, unit replacement costs, logistical expenses and expenses relating to the hiring of temporary contractors to assist with the Company's recall efforts.

There have been certain legal proceedings brought against us in connection with the melamine contamination incident, which may have an adverse effect on our results of operations, see Part II - Item 1. Legal Proceedings below and "Part I
- Item 1A. Risk Factors - Product liability claims against us could result in adverse publicity and potential significant monetary damages" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009. Although management is not aware of any additional significant issues associated with the melamine contamination incident, there can be no assurance that additional issues will not be identified in the future and this may have an adverse effect on our results of operations. See "Part I - Item 1A. Risk Factors - We are highly dependent upon consumers' perception of the safety and quality of our products. Any ill effects, product liability claims, recalls, adverse publicity or negative public perception regarding particular ingredients or products or our industry in general could harm our reputation and damage our brand and adversely affect our results of operations" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

Our net sales for the fiscal quarter ended June 30, 2009 decreased by 62.8% to $47.4 million from $127.4 million for the same period in the previous year. Our gross profit for the fiscal quarter ended June 30, 2008 decreased by 70.7% to $19.6 million from $66.9 million for the same period in the previous year. Our net loss for the fiscal quarter ended June 30, 2009 was $9.9 million, as compared to net income $15.6 million for the same period in the previous year.

The drop in the Company's net sales reflected in part the lingering impact of the product recall carried out in late 2008. Also, the distribution of free replacements for recalled products created an inventory glut in the sales channel that was shrinking but still present and contributing to the depressed sales during the quarter ended June 30, 2009. The absence of its products from shelves (for the duration before product replacement completed) has resulted in loss of customers, especially for the U-Smart product line. In this first fiscal quarter, the Company's infant formula segment recorded net sales of $42.47 million with a gross profit of $20.20 million. The Company believes its premium line of Super series infant formula products which account for about 56% of segment sales have led the segment in market recovery and helped to stabilize the Company's market position.

Though powdered formula sales have improved since the quarter (ending December 31, 2008) that immediately followed the recall, the Company has not yet recovered its pre-recall market share. In meeting the considerable challenges, including the significant brand equity damage sustained by the U-Smart series, the Company has focused on fundamental approaches to procure new customers through its integrated marketing platform, capitalizing on database resources built with a nationwide deployed team of more than 500 nutrition education specialists who work directly with medical and healthcare professionals at maternity wards or clinics throughout the country. The Company also made sales and distribution system adjustments including a new inventory control and monitoring mechanism aimed at improving sales efficiency and effectively managing inventory level within the distribution channel which comprises of more than 480 distributors across the market.

The Company's main operations are located in mainland China. Though the recent disruptions in the overall economy and financial markets is less severe in China than in the U.S., it could reduce consumer confidence in the economy and negatively affect consumers' spending, which could be harmful to our financial position and results of operations. See "Part I - Item 1A. Risk Factors - The recent disruptions in the overall economy and the financial markets may adversely impact our business and results of operations and may limit our access to additional financing" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

Unless otherwise noted, all translations from Renminbi to U.S. dollars were made at the middle rate published by the People's Bank of China, or the middle rate, as of June 30, 2009, which was RMB6.8319 to $1.00. We make no representation that the Renminbi amounts referred to in this Quarterly Report on Form 10-Q could have been or could be converted into U.S. dollars at any particular rate or at all. On August 7, 2009, the middle rate was RMB 6.8316 to $1.00.

CRITICAL ACCOUNTING POLICIES

We follow certain significant accounting policies when preparing our consolidated financial statements. A summary of these policies is included in our Annual Report on Form 10-K for the year ended March 31, 2009 (Form 10-K) under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates". The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses, and the related disclosures of contingent assets and liabilities at the date of the financial statements. We evaluate these estimates and judgments on an ongoing basis and base our estimates on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Our actual results may differ from these estimates.

We believe that the estimates, assumptions and judgments involved in the accounting policies described in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our most recent Annual Report on Form 10-K have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies.

RESULTS OF OPERATIONS

Three months ended June 30, 2009 and 2008

Net Sales

Net sales for the fiscal quarter ended June 30, 2009 decreased by 62.8% to $47.4 million from $127.4 million for the same period in the previous year. This decrease in net sales was mainly due to the loss of market share caused by the melamine contamination incident.

Powdered formula segment

Net sales of our powdered formula products, including infant milk formula and other powdered formula products for children and adults under our Super, U-Smart, Mingshan and Helanruniu brand names, accounted for 89.7% of our total sales for the fiscal quarter ended June 30, 2009. Net sales of our powdered formula products for the fiscal quarter ended June 30, 2009 decreased by 64.0% to $42.5 million from $118.1 million for the same period in the previous year, primarily as a result of the following factors:

† Sales volume of powdered formula products decreased by 61.8% to 4,996 tons for the fiscal quarter ended June 30, 2009 from 13,066 tons for the same period in the previous year, due primarily to a slow-down in sales activities from September 2008 to June 2009 following the melamine contamination incident.

† The average selling price of our powdered formula products for the fiscal quarter ended June 30, 2009 decreased by 5.9% to $8,501 per ton from $9,036 per ton for the same period in the previous year. This decrease in average selling price was due to a greater proportion of rebates to distributors and slotting fees to supermarkets being recorded as reduction to net sales, partially offset by the effect of increased proportion of higher-priced products in our product mix and an increase of our sales price in August 2008.

Baby food segment

Net sales of prepared baby food business for the fiscal quarter ended June 30, 2009 was $343,000, representing sales of prepared baby food, such as cooked meat and vegetables. We did not have any net sales of prepared baby food business for the fiscal quarter ended June 30, 2008 as we acquired this business in October 2008. Our nutritional snack business was still in its pre-operation stage and hence did not have sales for the fiscal quarter ended June 30, 2009. We plan to begin its operations in late 2009.

Nutritional ingredients and supplements segment

Net sales of nutritional ingredients and supplements segment for the fiscal quarter ended June 30, 2009 was $56,000, representing chondroitin sulfate sold to third parties. We did not have any net sales in the fiscal quarter ended June 30, 2008 as the nutritional ingredients and supplements segment had not begun its operations by June 30, 2008.

Cost of Sales

Cost of sales for the fiscal quarter ended June 30, 2009 decreased by 54.0% to $27.8 million from $60.5 million for the same period in the previous year. The decrease in the cost of sales is due primarily to a decrease in the sales volume of our powdered formula products, partially offset by the increase in free products offered as promotional materials in the current period to regain market share following the melamine contamination incident.

Powdered formula segment

Cost of sales for the powdered formula products for the fiscal quarter ended June 30, 2009 decreased by 57.4% to $22.3 million from $52.3 million for the same period in the previous year. The decrease in the cost of sales is due primarily to the decrease in the sales volume of our powdered formula products. The sales volume of powdered formula products sold for the fiscal quarter ended June 30, 2009 decreased by 8,070 tons as compared to the same period in the previous year.

Baby food segment

Cost of sales of prepared baby food business for the fiscal quarter ended June 30, 2009 was $211,000, representing cost of sales of prepared baby food, such as cooked meat and vegetables. We did not have any cost of sales of prepared baby food business for the fiscal quarter ended June 30, 2008 as we acquired this business in October 2008. Our nutritional snack business was still in its pre-operations stage and hence did not have cost of sales for the fiscal quarter ended June 30, 2009. We plan to begin its operations in late 2009.

Nutritional ingredients and supplements segment

Cost of sales of nutritional ingredients and supplements segment for the fiscal quarter ended June 30, 2009 was $704,000, representing chondroitin sulfate sold to third parties. We did not have any cost of sales in the fiscal quarter ended June 30, 2008 as the nutritional ingredients and supplements segment had not begun its operations by June 30, 2008.

Gross Profit and Gross Margin

As a result of the foregoing, gross profit for the fiscal quarter ended June 30, 2009 decreased by 70.7% to $19.6 million from $66.9 million for the same period in the previous year. Gross profit for our powdered formula products for the fiscal quarter ended June 30, 2009 decreased by 69.3% to $20.2 million from $65.8 million for the same period in the previous year due primarily to decreased sales caused by the melamine contamination incident. Gross profit
(loss) for our baby food segment and nutritional ingredients and supplements segment for the fiscal quarter ended June 30, 2009 were $132,000 and ($648,000), respectively.

Our overall gross margin decreased to 41.4% for the fiscal quarter ended June 30, 2009 from 52.5% for the same period in the previous year. Our gross margin for powdered formula products was 47.6% for the fiscal quarter ended June 30, 2009, as compared to 55.7% for the same period in the previous year. The decrease in our gross margin for powdered formula products was primarily due to increased free products offered to our customers in the aftermath of the melamine contamination incident, partially offset by an increase in the proportion of sales of our higher margin infant formula products. Our gross margin for baby food segment for the fiscal quarter ended June 30, 2009 was 38.4%.

Selling and Distribution Expenses

Selling and distribution expenses for the fiscal quarter ended June 30, 2009 decreased by 7.9% to $10.5 million from $11.4 million for the same period in the previous year. This decrease was a combination result of an increase in compensation expenses for our sales force, a decrease in freight charges and a decrease in office expenses. Total compensation for our sales force for the fiscal quarter ended June 30, 2009 increased by 15.4 % to $6.0 million from $5.2 million for the same period in the previous year, due primarily to an increase in the number of sales staff to 3,170 as of June 30, 2009 from 2,621 as of June 30, 2008. Freight charges for the fiscal quarter ended June 30, 2009 decreased by 73.9 % to $0.6 million from $2.3 million for the same period in the previous year, due primarily to decreased sales volume. Office expenses for the fiscal quarter ended June 30, 2009 decreased by 75.0 % to $0.3 million from $1.2 million for the same period in the previous year, due primarily to tightened budgetary control.

Advertising and Promotion Expenses

Advertising and promotion expenses for the fiscal quarter ended June 30, 2009 decreased by 52.8% to $15.1 million from $32.1 million for the same period in the previous year. Advertising expenses for the fiscal quarter ended June 30, 2009, which accounted for 54.7% of total advertising and promotion expenses, decreased by 55.9% to $8.3 million from $18.8 million for the same period in the previous year. Promotion expenses for the fiscal quarter ended June 30, 2009, which accounted for 45.3% of total advertising and promotion expenses, decreased by 48.1% to $6.9 million from $13.3 million for the same period in the previous year. After an aggressive advertising and promotional campaign in the fiscal quarter ended March 31, 2009 to regain market share in the aftermath of the melamine contamination incident, we intentionally slowed down our advertising and promotional expenses in the fiscal quarter ended June 30, 2009 to better utilize our resources.

General and Administrative Expenses

General and administrative expenses for the fiscal quarter ended June 30, 2009 increased by 18.1% to $4.6 million from $3.9 million for the same period in the previous year. The increase in general and administrative expenses was primarily due to an increase of $0.4 million in salary and social insurance as result of the increased headcount, and an increase of $0.3 million in depreciation and amortization expenses.

Other operating income, net

Other operating income for the fiscal quarter ended June 30, 2009 was $117,000, as compared to nil for the same period in the previous year.

Interest Income

Interest income for the fiscal quarter ended June 30, 2009 increased to $0.5 million from $0.2 million for the same period in the previous year.

Interest Expense

Interest expense for the fiscal quarter ended June 30, 2009 increased to $2.4 million from $0.5 million for the same period in the previous year, due primarily to the significant increase in bank borrowings after the melamine contamination incident.

Provision (Benefit) for Income Tax

As a result of the net loss, we recorded an income tax benefit of $3.2 million for the fiscal quarter ended June 30, 2009, as compared to an income tax expense of $3.0 million for the fiscal quarter ended June 30, 2008. Our effective tax rate increased to 24.4% for the fiscal quarter ended June 30, 2009 from 16.3% for the same period in the previous year. This increase in our effective income tax rate was primarily due to the expirations of tax holidays enjoyed by certain subsidiaries in China.

Net Income (Loss) Attributable to Stockholders

As a result of the foregoing, net loss attributable to stockholders for the fiscal quarter ended June 30, 2009 was $9.9 million, as compared to net income of $15.6 million for the same period in the previous year.

LIQUIDITY AND CAPITAL RESOURCES

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As a result of the melamine contamination incident and the subsequent product recall, we have experienced significant operating losses and negative cash flows from operations for the fiscal year ended March 31, 2009 and the fiscal quarter ended June 30, 2009. As of June 30, 2009, we had a working capital deficit of approximately $83.7 million. In addition, we have not been in compliance with certain covenants in our New ABN loan agreement as of June 30, 2009. We are attempting to renegotiate the terms and covenants of the New ABN loan agreement. As a result of the occurrence of these recent economic events, the ensuing operating losses and negative cash flows and our failure to meet our debt covenants, the report of our independent registered public accounting firm for the fiscal year ended March 31, 2009 contains a reference raising substantial doubts about our ability to continue as a going concern. See Note 2(A) and Note 11 to the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009. We are currently in the process of evaluating funding alternatives including seeking refinancing of certain short-term loans from PRC banks. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We intend to seek to overcome any substantial doubt concerning our ability to continue as going concern by continuing to pursue our strategic operating goals for enhanced profitability and by obtaining new debt and/or equity financing. Any substantial doubt about our ability to continue as a going concern could also affect our relationship with our trade suppliers and their willingness to continue to conduct business with us on terms consistent with historical practice. These suppliers might respond to an apparent weakening of our liquidity position and to address their own liquidity needs may request faster payment of invoices, new or increased deposits or other assurances. If this were to happen, our need for cash would be intensified and we might be unable to make payments to our suppliers as they become due. See "Part I - Item 1A. Risk Factors - The report of our Independent Registered Public Accounting Firm contains a reference raising substantial doubt about our ability to continue as a "going concern" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

The recent melamine contamination incident has significantly impacted our liquidity. Since the damage to our reputation caused by the melamine contamination incident will take time to recover, the net sales of our powdered formula products were negatively impacted in the fiscal year ended March 31, 2009 and fiscal quarter ended June 30, 2009. In the meantime, we incurred substantial cash outflow for the purchase of raw materials and for operating expenses.

Accordingly, we have had discussions with local banks to obtain short term financing to support our operational needs. As of June 30, 2009, we had short-term borrowings from local banks of $241.4 million with a weighted average interest rate of 3.51%. The loans were secured by the pledge of certain fixed assets held by the Company's subsidiaries, pledge of land use right in Qingdao, China and pledge of cash deposits which was recorded as restricted cash. The maturity dates of the short-term loans from local banks outstanding at June 30, 2009 range from July 2009 to June 2010. As of the date of the filing of this 10-Q, all outstanding short-term loans that have become due have been repaid. As of June 30, 2009, we have unsecured long-term borrowing from local banks of $16.1 million maturing from March 2011 to June 2012 with a weighted average interest rate of 5.4 %. In addition to the loans from local banks, we also borrowed from related parties short-term loans amounting to $6.6 million with a weighted average interest rate of 8.1 % to finance our acquisition of the Helanruniu trademarks and to support our normal operating needs. The maturity dates of the short-term loans outstanding from related parties at June 30, 2009 are from October 2009 to January 2010. As of June 30, 2009, we are not able to meet the financial covenants of the ABN loan and hence it was reclassified to current liabilities since we considered this debt callable by the bank. As of the date of the filing of this 10-Q, the waiver has not been granted. Prior to the melamine contamination incident, cash generated from our operating activities were sufficient for normal operating needs, and financing from banks was normally related to investing activities such as expansion of our manufacturing plant.

In order to maintain sufficient funds for our operations, we have postponed the payment of certain accounts payable. The payment terms of accounts payable were usually three months. We negotiated with some suppliers and extended the payment terms.

We do not expect significant cash outflow in relation to the product recall and . . .